FHA Loans

What is an FHA loan?

It’s a bit of a misnomer, since Federal Housing Administration (FHA) loans are not
loans at all. What they do is insure loans so that lenders can offer mortgage assistance
to people who:

Have fair or poor credit

Have a low down payment (must have at least 3.5%)

Have undergone bankruptcy

Have been foreclosed on

Essentially, the federal government insures loans for FHA-approved lenders so that
lenders reduce their risk of loss if they lend to borrowers who could default on
their mortgage payments. The FHA program has been in place since the 1930s to help
stimulate the housing market by making loans accessible and affordable. Traditionally,
FHA loans have helped military families who return from war, the elderly, handicapped,
or lower-income families, but really, anyone can get an FHA loan – they are not
just for first-time home buyers.

What are the advantages of FHA loans?

An FHA loan is the easiest type of real estate mortgage loan to qualify for because
it requires a low down payment and you can have less-than-perfect credit. Also,
because FHA insures your mortgage, lenders are more willing to provide loans. Another
advantage of an FHA loan is it’s assumable, which means if you want to sell your
home, the buyer can “assume” the loan you have. FHA loans can be used for a home
purchase or a refinance.

How do I get an FHA loan?

You can shop anonymously for mortgage rates for an FHA loan on Zillow
Mortgage Marketplace. Just submit a loan request and you will receive custom
quotes instantly from a marketplace filled with thousands of lenders. The process
is free, easy and best of all, you are anonymous.

No minimum requirement for credit scores, but past credit performance will be scrutinized.
FHA-qualified lenders will use a case-by-case basis to determine an applicants’
credit worthiness.

Must be two years out of bankruptcy, with good credit.

Must be three years out of foreclosure, with good credit.

What are the disadvantages of an FHA mortgage?

You knew there had to be a catch and here it is: Since an FHA loan does not have
the strict standards of a conventional loan, it requires two kinds of mortgage insurance
premiums: one is paid in full upfront -or, it can be financed into the mortgage
– and the other is a monthly payment. Also, FHA loans require that the house meet
certain conditions and must be appraised by an FHA-approved appraiser.

Upfront mortgage insurance premium (MIP) — Appropriately named,
this is an upfront monthly premium payment, which means borrowers will pay a premium
of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan
x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement
charges or can be rolled into the mortgage.

Annual MIP (charged monthly) — Called an annual premium, this is
actually a monthly charge that will be figured into your mortgage payment. It is
based on a borrower’s loan-to-value (LTV) ratio and length of loan. There are two
different Annual MIP values: 0.50% and 0.55%. If the LTV is less than or equal to
95 percent, a borrower will pay 0.50%. For LTVs above 95 percent, annual premiums
will be .55%. Example (for LTV less than 95%): $300,000 loan x 0.5 = $1,500. Then,
divide $1,500 by 12 months = $125. Your monthly premium is $125 per month. To understand
when you will stop paying mortgage insurance:

For mortgages with terms more than 15 years, the MIP will drop off after five years
(in most cases) or when the remaining balance on the loan is 78 percent of the value
of the property — whichever is longer.

For mortgages with terms 15 years and less and with LTV ratios of 90% and greater,
the MIP will stop when the LTV ratio reaches 78% — no matter what length of time
the borrower has paid the MIP.

For mortgages with terms 15 years and less and with LTV ratios of 89.99% and less,
you will not be charged MIP.

Property needs to meet certain standards — Also, an FHA loan requires
that a property meet certain minimum standards at appraisal. If the home you are
purchasing does not meet these standards and a seller will not agree to the required
repairs, your only option is to pay for the required repairs at closing (to be held
in escrow until the repairs are complete).

Important note: Prior to Oct. 1, 2008, premiums were figured using a risk-based
calculation, taking into account a borrower’s credit score and loan-to-value ratio.
However, on Oct. 1, 2008, a one-year moratorium was instituted on this method by
the Housing and Economic Recovery Act of 2008. Keep current on the premium costs
for FHA loans by visiting the U.S. Department
of Housing and Urban Development (HUD).